How Do Limit Orders Affect the Disposition Effect on Highly Liquid Markets–Experimental Finance Evidence
Dvorackova H. Tichy T. Jochec M.
2023Institute of Behavioral Finance
Journal of Behavioral Finance
2023#24Issue 3290 - 302 pp.
We examine the effect of selected limit order tools (stop loss, take profit, and trailing stop) on the disposition effect, a well-known behavioral bias, by using experimental trading data. Our presumption is that the limit orders should significantly eliminate this behavioral bias, which may lead to higher losses than feasible for a trader. The traders of our data sample can be considered as a sample of beginners or less informed traders. Based on our analysis it is possible to conclude that limit orders have a significant impact on the disposition effect. Traders using these tools were able not only to avoid this behavioral bias, but even reverse it, which is, as far as we know, a unique result within the existing literature. Moreover, we found out that the impact of eliminating of the disposition effect by limit orders use is positive, as it may lead to significant loss reduction. On the other hand, the effect on profits is insignificant.
Behavioral bias , Behavioral finance , Disposition effect , Experimental finance , Limit orders
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Faculty of Economics, VŠB-Technical University of Ostrava, Czech Republic
Graduate School of Business, Nazarbayev University, Kazakhstan
Faculty of Economics
Graduate School of Business
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